U.S. MARKETS

As we have made abundantly clear in the Trends Journal with copious facts and figures, the rise in the equity markets on Wall Street have no correlation to the dire economic conditions that have hit Main Street.

We have been reporting since last year, when the Federal Reserve pumped some $7 trillion into the repo markets so trading houses could get cheap money to gamble, that by their deeds, the markets are rigged.

And now, in response to the destruction of the economy by the lockdowns, equities are being artificially propped up by Washington and the Feds with the zero interest rate policy, quantitative easing, and other money pumping schemes undreamed of that are anathema to capitalism.

The facts are clear. With the S&P 500’s trailing price-to-earnings ratio at 21.61, the markets are extremely overvalued.

According to CNBC, the forward S&P 500 PE ratio, which is measured using earnings estimates for the next 12 months, has jumped to 22.18, near its highest levels in almost two decades.

Yes, the S&P PE ratio trading near its highest levels in almost two decades at a time when businesses have been locked down and over 40 million Americans out of work. And now, with businesses being allowed to reopen with massive restrictions, i.e., capacity limits, social distancing, mask wearing, etc., it is unfathomable that equities are rising as profits are forecast to collapse.

Rarely, if ever, has the mainstream business news reported on the concerts, festivals, conventions, trade shows, etc. – and all those who make a living from them – that are now down and out.

Instead, they focus on the strength of tech stocks… and the markets keep hitting new highs.

Today, the Nasdaq hit another record high and the Dow climbed 131 points.

2 Comments
  1. Cesar E 2 weeks ago

    Interesting, thanks.

  2. Craig Bradley 2 weeks ago

    A stock market supported by just a select group of big (tech) stocks in one or two sectors is lacking in Breadth. Its like a big rock formation with a large top formation and a tiny, narrow supporting column of rock. Gravity is waiting in-the-wings to take it down. All it takes is a tremor or other natural disturbance to topple it. Ditto with markets exhibiting narrow breath. High P/E Ratios below 35 can persist for some time and therefore, can not be used as a market timing factor with any success.

    BAD BREATH

    All the FED stimulus, asset purchases through various new “lending facilities” and money printing ( QE Infinity) have certainly distorted markets. Those with access to free chips ( zero interest rate loans) can take advantage of this kind of speculative market, while everyone else (retail investors) merely follow the herd or greater trends. FED economic stimulus practices tend to favor hedge funds and large investment banks, as well as large corporations over public investors. Insiders operate with inside information while others are prohibited from doing so by law. This is commonly referred to as “crony capitalism”. Not equivalent to free markets and true capitalism, long extinct.

    Instead, manage investment risk by allocations. Too many stocks of any kind in globally synchronized markets ( all central banks in on this one ) means lack of diversity and too much systemic risk, as you allude to here. Once the ball starts to roll downhill again in the next correction, chances are ALL global markets will decline with a high correlation (.80). In the mean time, Gold, short term U.S. Treasuries, cash ( in USD ) and maybe some global real estate are good hiding places when markets look overly risky and over valued compared to individual company fundamentals. As the saying goes, eventually ( even years later ) everything tends to revert to the mean.

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